As anticipated, the European Central Bank (ECB) decided to keep interest rates unchanged on Thursday, breaking a remarkable streak of 10 consecutive rate hikes. However, the ECB emphasized that it was too early to discuss any potential rate cuts.
Starting from July 2022, the ECB has implemented a series of interest rate hikes totaling 4.5 percentage points in an effort to address surging price levels. However, last month, the bank hinted at a pause in rate hikes as the record-high borrowing costs started to impact the economy.
In a significant development, price pressures have subsided, leading to a more than 50 percent decrease in inflation over the past year. Furthermore, the economy has experienced a notable slowdown, raising concerns of a potential recession. These factors have strengthened market expectations that the era of rate hikes has concluded and that the ECB’s next move may involve a rate cut.
Following the monetary policy committee meeting in Athens, ECB President Christine Lagarde highlighted in a news conference that while the eurozone‘s economy was weak, price pressures are still strong. Lagarde highlighted the potential for further escalation of price pressures if the Middle East conflict resulted in increased energy costs.
“For the moment we are saying we are steady, we have to hold,” she said, noting that even having a discussion on a cut, including speculation about rate cuts, is totally premature.
After a significant debt crisis that impacted Greece in the past decade, the policymakers of the ECB gathered in Greece for the first time in 15 years.
Lagarde acknowledged that the implemented rate hikes have undeniably exerted a considerable influence on the economy, notably resulting in a reduction in bank lending.
Following the recent decision, the ECB’s deposit rate remained at an all-time high of 4 percent, while the main rate stands at 4.5 percent.
The choice to maintain unchanged interest rates is expected to reinforce the belief that major central banks worldwide, including the Federal Reserve, are effectively implementing a policy tightening approach following an extraordinary sequence of simultaneous rate hikes.
This is expected to redirect the market’s attention towards the duration for which prices will need to remain at their current highs.
“The economy is likely to remain weak for the remainder of this year,” said Lagarde. “But as inflation falls further, household real incomes recover and the demand for euro area exports picks up, the economy should strengthen over the coming years.”
Preliminary data set to be released next week suggests that inflation in the eurozone, which reached 4.3 percent in September, may decrease to approximately 3.1 percent in October. However, this figure remains significantly higher than the official inflation target of 2 percent set by the bank.
During the meeting, the ECB Board reaffirmed its commitment to further expanding the bond portfolio purchased under the pandemic emergency purchase program, which currently amounts to 1.7 trillion euros ($1.8 trillion). The plan is to continue this expansion until the end of the following year.
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